Here is the short version of some of the insane aspects of the HSBC settlement and the open admission by the U.S. and the U.K. governments that our largest banks and their officers are "too big to prosecute." (Readers who wish to read the full document can find it here.)
1. It is nonsensical to say that we cannot prosecute HSBC's bank officers for their frauds because the regular morons occupying senior positions in our now officially oxymoronic Department of Justice* (*huge exceptions apply) fear that prosecuting HSBC could cause it to fail and trigger a global crisis. Prosecuting HSBC's fraudulent officers poses zero risk of causing HSBC to fail. Indeed, it is one of the best things we could do to reduce HSBC's risk of failure.
2. DOJ's, Treasury's, and the banking regulators' claim that leaving fraudulent officers in control of HSBC is essential to maintaining the safety of the banking system is either an example of irony worthy of The Onion or another proof of our family rule that it is impossible to compete with unintentional self-parody. I confess that when we were regulators we never considered the possibility that we would made banks safer by leaving the felons in charge.
3. DOJ claims that one of the reasons why there is no need to prosecute HSBC is because nearly everyone in power at HSBC during the 15 years it was committing the felonies that are the subject of this settlement (a small subset of the total range of HSBC's recent scandals) has been removed from power. That claim is false, but if it were true it would make the refusal to prosecute the former officers who became wealthy from the frauds even more preposterous. I want to see and hear a DOJ official, or Treasury Secretary Geithner, stand up and tell the world with a straight face that prosecuting a former officer of HSBC could cause a global financial crisis.
4. If the premise of "too big to prosecute" is that the HSBCs of the world are so fragile that prosecuting any of their officers for their frauds must be avoided at all costs because of the risk, no matter how faint, that it could cause the bank to fail then we know logically that two of DOJs claims about the HSBC immunity deal must be false.
a. The prosecution is not simply "deferred" -- it will never happen. When HSBC commits its next scandal it will be more vulnerable to failure should DOJ prosecute it for the latest scandal and the frauds that are the subject of the current "deferred prosecution" agreement. It will be imperative, under DOJ's logic, to avoid a double-barreled prosecution. Justice deferred is justice denied for the victims of systemically dangerous institutions (SDIs) like HSBC.
b. The fine imposed on HSBC must be immaterial from HSBC's perspective. DOJ's logic is that it must not prosecute anyone, no matter how egregious HSBC's frauds, lest it create even the most trivial of risks of HSBC failing. Under that logic it is inevitable that the fine that DOJ will seek will not pose even the faintest risk of causing HSBC the faintest operational concern. The good news for DOJ's propagandists is that HSBC is such a massive and profitable criminal enterprise that it can agree to a fine that many people will think is very large but which is a minor inconvenience to HSBC. Indeed, my explanation greatly overstates the impact of the fine for corporations are not people. They are run by their controlling officers, who grow wealthy from HSBC's frauds but are not held accountable for them. The impact of the fine on HSBC's controlling officers is trivial. The abject failure to deter is inherent under the "too big to prosecute" doctrine.
The broader insanity is that honest SDIs already had crippling advantages over non-SDIs because of the massive, implicit federal subsidy that greatly reduces their cost of borrowing. (The "too big to fail" doctrine has meant that an SDI's general creditors were paid in full by the government when the SDI failed. The theory was the need to prevent any risk of "cascade" banking failures. This implicit federal guarantee means that SDIs can borrow at a much lower interest rate compared to their competitors.) Honest SDIs make "free" markets impossible and have an overpowering incentive to maintain their subsidy through political domination.
The "too big to prosecute" doctrine gives fraudulent SDIs, and their officers, an additional competitive advantage over any honest firm, even honest SDIs. The ability to commit fraud with immunity from prosecution creates a decisive competitive advantage for dishonest SDIs over honest banks. This creates a "Gresham's" dynamic in which bad ethics drives good ethics from the marketplace and it creates an incentive for the SDIs to use their political power to produce deeply criminogenic environments through driving the regulatory "race to the bottom" that will maximize the "three de's" -- deregulation, desupervision and de facto decriminalization. The HSBC case exemplifies each of the "de's." The job package for SDI officers just got an addition -- immunity from prosecution - priceless!
HSBC marks the triumph of crony capitalism in the U.S. and the U.K. It is a sterling demonstration of how little difference there is between political leaders on the left and the right. Fraudulent SDIs have no permanent alliances or ideology -- only permanent interests in being above the law and free of "free" market competition.